Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Micron Technology (Nasdaq: MU ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Micron Technology.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||10.8%||Fail|
|1-Year Revenue Growth > 12%||3.6%||Fail|
|Margins||Gross Margin > 35%||20.0%||Fail|
|Net Margin > 15%||1.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||20.3%||Pass|
|Current Ratio > 1.3||2.35||Pass|
|Opportunities||Return on Equity > 15%||1.9%||Fail|
|Valuation||Normalized P/E < 20||23.43||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Micron Technology last year, the memory-chip maker has seen its score plunge by four points. Tepid sales growth, margin contraction, and falling profitability are all to blame for the downgrade.
At first glance, Micron seems like it should fare far better. With the world's electronics makers needing ever-increasing supplies of memory chips, Micron is tapped into a market with plenty of potential. Yet while niche players like Silicon Motion (Nasdaq: SIMO ) have found ways to profit, huge price wars between Micron and major rivals like SanDisk (Nasdaq: SNDK ) have taken their toll over the years.
The tough environment continues to weigh on Micron's results. In its most recent quarter, Micron unexpectedly reported an adjusted loss, blaming a weak consumer PC market as prices for the DRAM chips that PCs use dropped precipitously. It also doesn't help that the company has Nokia (NYSE: NOK ) and Research in Motion (Nasdaq: RIMM ) , both of which have struggled lately, as major customers.
Micron did get some very good news recently, though. Last month, Micron got a favorable verdict in the lawsuit that Rambus (Nasdaq: RMBS ) filed against it years ago. With damages that could have been as high as $12 billion, the decision let investors breathe a sigh of relief.
In the long run, though, Micron needs to see better conditions for the industry before it can truly declare victory. Until that happens, Micron will stay far from perfection.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."